For some time, the continued depreciation of the yen has not only affected the stability of Japan's economy and financial markets, but also exerted great pressure on Asian emerging market countries. After withdrawing from its negative interest rate policy in March, the Bank of Japan did not adjust the size of its asset purchases, rather than continuing to promote QE. The "reversal" of this policy shift has given currency speculation an opportunity to push the yen down to an all-time low, taking into account the postponement of Fed interest rate cuts. At a time when the Japanese government's intervention in the exchange rate market had no obvious effect, the Bank of Japan unexpectedly scaled back its purchases of government bonds and began to withdraw from the QE on May 13. The market believes that the central bank's move will narrow the interest rate gap between Japan and the United States, which is more effective than government intervention to ease the depreciation of the yen. At the same time, whether the Bank of Japan will go further on the road of withdrawing from the loose policy in the future has also become the focus of the market.
At present, the yield on 10-year Japanese government bonds, which is the anchor of Japanese interest rates, broke through 1% on May 22, meaning that the market has expected the Bank of Japan to accelerate the withdrawal of easing policy and further raise interest rates. Many market institutions expect the BoJ to raise interest rates further in the near future to avoid excessive depreciation of the yen. Some market participants expect the Bank of Japan to announce a broader reduction in bond purchases at its June meeting before a potential interest rate hike in July. And Morgan Stanley analysts said in a report that if inflationary pressures in Japan continue, the yield on 10-year Japanese government bonds could climb to 1 by the end of 2024.Jokerwildvideopoker.25%, thus forcing the Bank of Japan to raise interest rates by more than expected. However, if the Bank of Japan raises interest rates and accelerates its exit from QE, it remains to be seen whether the Japanese economy can withstand the pressure of rising interest rates. At a time when the Japanese economy is weak, the Bank of Japan is also faced with a dilemma in tightening monetary policy.
In fact, under the Fed's "violent" interest rate hike, the strong position of the dollar has led to the continued depreciation of the yen in recent years. Previously, researchers at the Anbang think tank have pointed out that although the depreciation of the yen is beneficial to Japan's foreign exports and Japan's capital market, it may not be beneficial to the Japanese economy as a whole under the effect of imported inflation. Since the beginning of this year, although the Bank of Japan withdrew from negative interest rates in March, it has failed to stop the yen from depreciating further. The yen fell to an all-time low of 160 against the dollar. However, the depreciation of the Japanese yen under the Bank of Japan's QE policy has further revealed its harm to the Japanese economy.
In the first quarter of this year, Japan's gross domestic product (GDP) fell 2.0 per cent from a year earlier and 0.5 per cent from the fourth quarter of last year. This is after the fourth quarter of last year, the Japanese economy returned to the depressed state of negative GDP growth in the quarter. From the point of view of demand, the economic downturn is universal, with domestic demand sluggish as well as exports due to the decline in personal consumption and business spending. This overall contraction has cast a shadow over the prospects for the normalization of BoJ policy. On the inflation front, Japan's core CPI has risen above the 2 per cent inflation target for 24 consecutive months since April 2022, the longest period of core CPI above 2 per cent since Japan plunged into deflation in 1995. Some economists believe that Japan is ushering in an economic crisis characterized by stagflation due to rising domestic prices and shrinking wages, coupled with the simultaneous attack of economic recession and inflation. In this process, the excessive devaluation of the yen has increasingly become the "culprit".
Since the beginning of this year, exports and tourism have generally benefited from a more competitive exchange rate amid the continued depreciation of the yen, but Japan's net exports have not effectively increased due to high import prices of raw materials. In fact, Japan again ran a trade deficit of about $3 billion in April amid the rapid depreciation of the yen. At the same time, Japanese households and small businesses are being squeezed by the rising cost of imports. Against the backdrop of a weaker yen, domestic price increases in Japan have caught up with wage growth. Some analysts believe that the biggest reason for the economic downturn is the decline in real household income, leading to stagnant consumption. Preliminary statistics released by Japan's Ministry of Health and Labor a few days ago show that after deducting price increases, Japan's real wage income fell 2.5% in March from a year earlier, which has decreased for 24 consecutive months, setting a record for the longest continuous decline in wages since comparable statistics began in 1991. Economists believe that due to the depreciation of the yen, wages adjusted for inflation are likely to continue to fall.
However, apart from capital policy speculation, the interest rate gap caused by the policy difference between the Federal Reserve and the Bank of Japan can be said to be the root cause of the depreciation of the yen. For a long time, a large amount of money, including Japanese domestic capital, has been invested abroad in low-cost Japanese yen, especially after the rise in dollar interest rates. Although the Japanese stock market has begun to attract some international capital inflows in recent years, on the whole, the carry trade caused by the widening spread between Japan and the United States has continuously depressed the exchange rate of the yen. This is also one of the reasons why the Bank of Japan has to withdraw from ultra-loose policy. At present, the prospect of "stagflation" facing the Japanese economy has also brought greater difficulties to the policy shift of the Bank of Japan. However, in the case of the low exchange rate of the yen, it has done more and more real damage to the Japanese economy.
At the same time, to the embarrassment of the Japanese government, the Japanese economy is shrinking again, indicating that Japan's long-term quantitative easing policy has lost its effect on the Japanese economy, showing a series of negative effects such as the depreciation of the yen. The policy shift of the Bank of Japan is also imperative, even if it still has to pay a heavy price in the short term. This price will also allow the Bank of Japan to take a safer way to bid farewell to ultra-loose policy, and there should be no "sharp turn" extreme decision-making.
Final analysis conclusionJokerwildvideopokerWith Japanese government bond yields above 1 per cent a decade ago, market expectations are rising for the BoJ to accelerate its exit from ultra-easing. In fact, with the widening interest rate spread between Japan and the United States, the recent depreciation of the yen exchange rate is causing more and more obvious damage to the Japanese economy. The negative effects of the Bank of Japan's long-term easing are increasing as the Fed raises interest rates. It also forced the Bank of Japan to accelerate its exit from ultra-loose policy. (source: Anbang Consulting)